How the Trans-Pacific Partnership Will Change Canada

The first big news out of the Los Cabos G-20 summit was unrelated to the G-20 itself. It was the U.S. announcement that Mexico has won a formal invitation to join the Trans-Pacific Partnership or TPP. On June 19, Canada won an invitation as well. Both invitations are conditional on continued efforts at domestic market liberalization, but the TPP partners clearly see progress in both countries that merits a welcome.

Last December in Hawaii, the Asia Pacific Economic Cooperation (APEC) countries met, and the TPP was the hot ticket: The United States pressed the other countries in the new TPP negotiations (Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam) to accept applications from Mexico, Japan and Canada to join the talks.

The TPP countries are working toward removing barriers to trade and creating a larger — and largely free — market. Together, they account for 650 million people and a combined GDP of more than $20 trillion. This is impressive at first blush, but 310 million of those people and $12 trillion of that economic output comes from the United States; Canada and Mexico already have secure market access to the United States through the North American Free Trade Agreement, and so the question arises: what is the benefit of joining the TPP for them?

When NAFTA was negotiated, the main barriers to international trade were tariffs (taxes on imports) and investment protections (which made it difficult or even impossible for foreign companies to open offices, factories or stores). NAFTA eliminated or reduced these barriers for Canada, Mexico and the United States in 1994. Along with the Uruguay Round Agreement that established the World Trade Organization in 1996, the NAFTA helped to fuel a boom in global trade and economic growth.

Soon after, firms and communities seeking protection from competition shifted their attention to regulation. By organizing themselves to dominate the regulatory processes of their home governments, special interests from industry groups to environmentalists restricted access to markets and privileged some individuals and firms over foreign rivals.

Then, after September 11, 2001, the United States led the world toward new inspection and security measures intended to prevent future terrorist attacks. This made business travel and international shipping and logistics more expensive, and raised prices for consumers. Compliance costs with new security requirements drove some small and medium-sized enterprises — the firms that create most new jobs — out of international markets entirely.

The financial crisis of 2007 and 2008 was the most obvious cause for the current global recession, but a decade of growth in the thicket of non-tariff barriers to international trade also contributed.

The United States began trying to address regulatory barriers to trade with Canada and Mexico through NAFTA Working Groups, established as part of the implementation of the agreement. These made little progress, since the U.S. debate over NAFTA’s ratification demonstrated weak political support for further liberalization. After 2001, the United States adopted “smart border” agreements with Canada and Mexico to address border security concerns, but these largely strengthened security cooperation while raising compliance costs associated with new procedures for shippers and travelers. From 2005 to 2009, the three countries engaged in the Security and Prosperity Partnership of North America, ambitious trilateral talks on regulatory and security cooperation. The SPP made modest progress, but was criticized for being nontransparent and detrimental to the three countries’ national sovereignties.

The Obama administration scrapped the SPP and downgraded talks on security, energy, and regulatory cooperation with its neighbors into two sets of bilateral talks. With Canada, the United States is engaged in the Beyond the Border working group on perimeter security, the Regulatory Cooperation Council, and a Clean Energy Dialogue. With Mexico, the United States has the Commission on 21st Century Border Management, the High Level Regulatory Cooperation Council, and another Clean Energy Dialogue. President Obama has pressed Canada and Mexico to merge these parallel talks to no avail.

Meanwhile, the Obama administration has been implementing a strategic “pivot” toward Asia in response to the rise of China. The George W. Bush administration began the pivot by strengthening military ties with India, Indonesia, Australia, South Korea, Japan and other Pacific Rim powers; the message to China was that it would not be possible to dominate the region by force, despite its military buildup.

China joined the WTO in 2001, and its economic growth since then has raised concerns in the United States about the extent to which China’s domestic regulations are a tacit barrier to imports and foreign investment, the degree to which state-owned enterprises are competing fairly with private enterprises in China and abroad, and China’s weak rule of law and property rights protections.

For the United States, the TPP is a vehicle for the creation of a high-standards community of countries committed to security, regulatory transparency and nondiscrimination, and private enterprise in free markets. The TPP negotiating agenda is at once similar to the bilateral agenda that Canada and the United States are pursuing, and also more ambitious and multilateral. The TPP could one day coax China further toward economic liberalization, if China wanted to secure greater access to TPP markets.

TPP members are about to begin their thirteenth round of talks on supply chain security and regulatory barriers to trade in San Diego in July. Canada and Mexico will join at a crucial time, and can now benefit from being integral partners in the U.S. grand strategy on China and the Asia-Pacific.

Despite Prime Minister Stephen Harper’s recent announcements of trade talks with various Asian countries, joining the TPP is a more important strategic victory for Canada. Bargaining alongside the United States, Canada can get concessions from other countries it couldn’t get alone. And as a TPP member, Canada can better safeguard its relationship and hard-won market access to the United States than if it was excluded.

Today’s announcement shows that Harper is paying close attention to Canada’s national interests, bilaterally and globally. And he is as capable of thinking in as grand strategic terms as Obama.